By Teresa Rivas

UBS thinks that global portfolios are grossly underweight in emerging markets, especially since these will account for nearly half of the global equity market capitalization in less than a decade.

That’s according to report released last week from Jennifer Delaney and her team. She calls emerging markets “too big to ignore,” but warns that investors who just peg their holdings according to the MSCI All-Country World Index (ACWI) are missing out: Although the weight of emerging markets in the index has more than tripled since 2002, from 4% to 13%, that’s still not enough to capture the true heft of these economies, which she estimates will account for 40% of the total global equity market cap by 2022, up from 26% today.

So what’s an investor to do? Adjust their portfolios. Delaney and team write that investors who weighted their portfolios to emerging market GDP instead of benchmark weights have historically outperformed. Yet investors can’t just get away with buying into BRIC countries either, which account for some 43% of the iShares Emerging Market Index ETF (EEM) and nearly 47% of the Vanguard FTSE Emerging Markets ETF (VWO). While Brazil, Russia, India and China—the latter alone should account for 40% of the emerging markets equity cap—are still important, she also points to economies across Southeast Asia, Eastern Europe and Latin America.

“Compared to weighting portfolios by GDP, the most over-represented countries in benchmarked portfolios today are Taiwan, South Africa, Korea and Malaysia,” the report states. “They all have representation in MSCI ACWI higher than their global GDP output would warrant. The most under-represented countries include China, Turkey, India, and Indonesia, as well as Morocco, Egypt, Czech Republic and Hungary. China, Turkey, India and Indonesia alone make up 17% of global GDP today and 13% of global market capitalization, but have just a combined 4% weight in global portfolios.”

In estimating how emerging nations will contribute to global equity capitalization in the coming years, one of the biggest factors was economic size, as growing economies produce growing equity markets, which are also more likely to “broaden and deepen.” Moreover, as reforms in many nations make the stock market more transparent, ownership should continue to increase.

Of course, that’s not to say that these projections will do much to boost lagging emerging markets in the near term, as burned investors pull back and fret about slowing rates of growth. Indeed, the report notes that while global emerging markets’ equity market capitalization grew 22% in the past decade—more than double its rate in the prior ten years—looking ahead UBS sees “a more moderate rate of market capitalization growth of 11% per annum,” given slowing GDP growth.

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